If you buy REOs — or if you’re even considering buying REOs in the future — you’re probably going to want to keep reading. In fact, as one of my readers has already pointed out, if you’re a real estate investor of ANY kind, this is something you’re going to want to keep in mind.
This is a story about an REO property (basically, a bank owned foreclosure) that we got under contract this week, and then realized that things weren’t exactly what they seemed. The story may be a bit long, but it may save you a lot of money down the road…
As a little back-story, my wife occasionally looks through the expired listings on the MLS to see if there may be something good that slipped through the cracks and that might be worth trying to negotiate. She found a property that looked like a good deal, and was surprised it didn’t sell at the listed price prior to expiring, so she called the listing agent to get more info.
The listing agent was confused, and said, “Oh, it’s not expired…it’s still active and ready to be sold…though we haven’t gotten much activity on it recently.” Clearly, she didn’t realize the MLS listing was incorrect, which also explained why there was no activity — no other agents or buyers even realized the house was for sale.
We went to look at it, and it was even nicer than in the pictures. Clearly, since the MLS pictures were taken, the seller (the bank) had come in and painted both the interior and exterior, replaced the carpet, and obviously made some additional repairs. It went from being a decent deal to what seemed like a great deal. Thinking we found a hidden gem lost in the MLS, we quickly put in an offer, and requested 3 days of an inspection period to do a bit more investigation should our offer get accepted.
With 24 hours, we received a counter-offer just a little higher than our offer price. The agent told us that the property was scheduled for auction, so she needed a response ASAP. We quickly accepted the counter-offer, and were excited that we got gotten this practically-move-in-ready house for such a great price, and without any competition!
But, as I usually do when I get a house under contract, I immediately sent my project manager over to see if there were any issues I might have missed on the initial inspection. He was working on a house around the corner, so he went right over…
He called me when he got there, and he pointed out a little mound of dirt in the corner of the kitchen. I had seen it, and knew that it likely meant termites, but I didn’t notice any additional or obvious damage in the area, so I assumed there was a minor termite problem — something we deal with all the time. But, luckily, my project manager investigated further. When he pushed on the baseboard at the bottom of the wall near the dirt mound, his finger went right through the baseboard!
He kept looking. Apparently, the entire baseboard was destroyed by termites and was only being held together by the fresh coat of paint that had recently been applied. He checked the window sills — completely eaten by termites. He checked the steps in the center of the house — many of the steps were destroyed by termite damage. He went upstairs and found that a bunch of the wood trim on the second level had been destroyed by termites, but again, was not obvious due to the fresh paint keeping the wood from crumbling.
Once he knew what he was looking for, it only took a few minutes to realize that — best case — there was likely $10,000 or more in damage, as many of the walls would need to be ripped out, framing components would likely need to be replaced, etc. Worst case, the house could have such extensive termite damage to the structure that it could be cheaper to just knock it down. And the house was less than 15 years old!!!
Without ripping out much of the drywall in the house, there was just no way to know how much work was needed or how difficult the damage would be to repair. Needless to say, we declined to purchase the property…
Anyway, the moral of the story is that someone — likely the bank who was selling it — went into the property and did their best to cover up the damage with some fresh paint, some new trim pieces, etc. And they actually did a pretty good job — enough that I have a feeling some unsuspecting buyer will get this property at an upcoming auction and not know until too late what he is facing.
Here are some things that should have tipped us off to investigate further:
* The property had been pulled off the MLS. While this may have been a mistake, it was probably done while the bank was making “repairs”.
* The bank chose to paint and carpet the house. While this happens occasionally, the bulk of the REOs in my area are sold as-is without any work done to them. The fact that the bank decided to do any work should have alerted me to be extra cautious.
* The listing said, “Cash or conventional loans only.” This is generally done when the property has some defect that wouldn’t allow the buyer to get FHA financing. In this case, I assumed it was a mistake, as the property looked to be in great condition. After buying a couple dozen houses, I should have realized that the more likely explanation was that something was being covered up.
Anyway, I’m sure there are a lot of ethical bank sellers out there who wouldn’t go out of their way to defraud a buyer, but as this clearly indicates, there are at least some that will do just the opposite — they will attempt to hide major defects and leave it to the buyer to uncover, either before they purchase the property, or worst-case, after the deal is done.
Since REO properties (and sometimes private deals) don’t come with any warranties or even any disclosures of damage, when it comes to buying these properties, it’s truly BUYER BEWARE!